What Actually Makes Ecommerce Brands Profitable? Real Benchmarks. Real Answers.

With me I have Stacy Walker, she's our Director of Growth, she oversaw the creation of this report. We're not gonna spend any more time on the slides, we're gonna spend our time on the report. So, Stacy, let's go to you and I'd love, let's start walking through the report and talk through what we're seeing in it.

0:52 High-level findings and first surprises

Stacy Walker

Yeah, thanks, Stephen. So many interesting things came out of this report, but really on a high level, let's talk about a few things that stood out just from the start. 44% of those that were part of this benchmark are currently growing and profitable. 20% are growing not profitable. 22% have had no growth, but are still profitable. And then there's 14% that have had no growth and are not profitable. And you can see we've got like our median gross margin sitting at about 63.7%.

Note that gross margin is after COGS. Our median cost of goods sold is 36.3. Now that's a percentage of their total revenue. Net profit is sitting at about 2.5%. Ad spend is at about 8.1% and year over year growth is at about 12%.

1:53

Yeah, so this was interesting. We broke down the different quadrants of performance. Here's a highlight of them. Let's go to that next one. I'm going to talk about some of the things we're seeing here. What surprised us? Was anything, as we broke down some of these demographics, what was one of the things that surprised you?

And I'll tell you what surprised me. Two things stood out to me. The first one is there's six points between growing and profitable and no growth and not profitable. I thought that span would be bigger as we went into this. I was a little surprised by that.

2:30 Stephen Brown

Six points in which metric? You talking about gross margin?

Stacy Walker

Gross margin.

Stephen Brown

Okay, so the gross margin spread was... Was it closer than you assumed or...?

2:37 Stacy Walker

Yeah. I thought it would be further than that. And then ad spend is such a smaller percentage of revenue than I thought it would be.

2:50 Ad spend, wholesale, and channel mix

Stephen Brown

Yeah, that was one of my big takeaways, especially in the last week.

2:55 Stacy Walker

We also saw a report released by EcomFuel, formerly known as eCommerceFuel. They released a report. Let me show you what they had and I'll talk about this ad spend. They did a survey. Ours was really focused on financial metrics. Theirs went a little bit broader. They were seeing that on average, so on the lower end, ad spend as a percentage of revenue was somewhat closer to what we were seeing.

But on the higher end, spenders, they were doing about 30%, which is more typically what I would expect for a direct consumer brand. So our data was really insightful. And part of the things that we've talked about with our data versus maybe other surveys, like we looked at the EcomFuel survey at the same time, we have pretty strong confidence in our data because the companies that we surveyed are companies that we work with. So we have pretty good confidence.

3:59 Stephen Brown

I actually have pretty good confidence in the data that they're saying around ad spend. That's a number that's easy to get to. I think, Stacy, if we go into the report again, one of our takeaways with our sample was how the channel diversity, and I think if we show that part of that report, it maybe explains why we saw a lower ad spend. So we saw what? 61% of the companies that we analyzed were selling wholesale.

4:33 Stacy Walker

Yeah, the wholesale component, and that gave us a little bit of, okay, it's possible that that's one of the big reasons that ad spend is less than we thought. Wholesale, I mean, when you're using wholesale as one of your sales channels, the ad spend is arguably less.

4:57 Stephen Brown

Correct. I think you get a dilution effect, right? Because you get more distribution for the, you know, ad spend is very key for, I wouldn't say it's not key for wholesale, but it's critical for the direct. So our data set had a lot of people doing wholesale, which would explain two things in our aggregate summaries. One is the cost of goods sold, or the gross margin, was a little bit lower than I would expect it, but when you're doing a fair amount of wholesaling, your sell price is going to be lower and so therefore you're going to probably see that gross margin go down.

5:35 Stacy Walker

And also there's a dilution on the ad spend. I did think it was really interesting comparing our data to EcomFuel's, is they had a very widespread on ad spend. Like their lower performers were spending 14% of revenue on ad spend and their higher performers were spending 32%. We saw a different correlation. We saw that the higher ones are spending less on ad spend. I'm not sure what to take away from this, right? Because I read both reports now and both have really interesting insights.

6:14 Stephen Brown

I think that one remains a little bit of an interesting thing, but I think for us, it's the fact that we have a large amount that are doing wholesale, which therefore dilutes that amount.

Stacy Walker

Yeah, yeah, I definitely agree with that.

6:30 The four performance quadrants

Stephen Brown

Go back to those four quadrants. I do think, you know, there was an interesting, some of these things were like, made sense, right? When we look at bank balances at the end of the year, the more profitable businesses had more cash, the less profitable had less. I mean, it kind of makes sense. If you're not profitable, your cash is going to be really lean. The amount of growth was a little bit astonishing from our growing and profitable businesses. I was pretty impressed with how large that number was.

7:15 Stacy Walker

Yeah, yeah. Year over year growth, 47.5%. That's very impressive for sure. And even with our growing but not profitable at 29%, some could argue this is like their strategy, right?

7:29 Stephen Brown

Yeah, there's a lot of brands I've seen and worked with where they've got investment, either personal capital or investor capital, and they're trying to build up a critical mass on that business and are deliberately operating at a loss. And that's a viable strategy as long as you have the cash to support that.

7:51 Stacy Walker

And you can see, but it was really interesting. A lot of times when I'm thinking about a growing, not profitable strategy, I'm really trying to grow as quickly as I can. And yet in our data, the profitable businesses were actually growing faster on the median.

8:10 Stephen Brown

Yeah, yeah, it's true. It's very true. What about no growth but profitable? How do you feel about the way like their gross margin is almost the same as growing and profitable? A little more on ad spend.

8:23 Stacy Walker

COGS is pretty close, not quite a percentage point off. Businesses like this, they're kind of stuck usually. And if I was gonna be stuck, it's a good place to be stuck because better be stuck and profitable than stuck and not profitable. I think businesses go through cycles. You hit limits on the effectiveness of the sales channels you're on, on the advertising channels you're using. And you haven't figured out how to unlock that growth. And that number, you know, that was a decent size of our sample, 22%.

9:09 Stephen Brown

Yeah. So I mean, if you're gonna be stuck, better there than the last one, honestly. The only quadrant that I really worry about is somebody who isn't growing and isn't profitable. There's no good business reason to be in that category. That's the one that I'm happy to see was the smallest segment, but it's a hard one. Every other segment has reasons and sometimes the top two can be very strategic about what you're trying to accomplish. If they're not growing and they're profitable, they're probably just stuck and haven't figured out how to unlock the next level of growth.

9:45 Stacy Walker

Yeah, yeah, I agree. What do you see as the biggest challenge for this no growth, not profitable?

9:54 Stephen Brown

You know, for me, it's profits. I'm becoming so much more a fan of profitability and things like Profit First. It is, you can be in that upper right quadrant where you're growing and not profitable, you can have funds, but there's always a clock ticking when you're not profitable. And so for me, you can see clear differences between, you know, the growing and profitable, you can't have both, right?

10:32 Stacy Walker

Yeah. And I think, you know, we've talked a little bit about Profit First on some of our resources. And I believe in the principles of it, that sometimes when you unlock profitability, you will eventually unlock growth. Because you'll figure out what's working in your business. And so what I would say to the lower no growth, not profitable segment is, you know, maybe lean in on the profit lever first to unlock some cash to experiment and then go hard on it. Experimentation, and figure out how to unlock the growth.

Stephen Brown

Yeah, I'm on that.

11:13 COGS, gross margin, and cost discipline

Stephen Brown

Let's talk about COGS for just a minute. Tell me why you think somebody who's growing and profitable would have like a smaller percentage of revenue that's cost of goods sold. Like if I'm not growing and I'm not profitable, do I really have any control over my cost of goods sold?

11:44 Stacy Walker

There are a few things you can control, right? You can control price and price will impact your cost of goods as a percentage of revenue, or your gross margin. So price does impact that. The thing about, you increase your price, it may increase your gross margin, but you may decrease your volume of sales. So that's the one thing you have to think about.

You know, it does stand out when we look at that, you maybe zoom in so we can just see that top chart a little bit easier. Go down, it's on the bottom right there. So I do think you can see, you know, it's not a huge difference, but it is significant, right?

12:36 Stephen Brown

And I think when I think about the path to profitability, it starts with your gross margins and your product costs and your pricing, right? So clearly there is a big, it doesn't explain all of the losses that we saw in our summary slide, but you know, there's a big difference. There's about six, seven points difference in that cost of goods or gross margin.

13:07

And that's a place to attack. First, you got to get your gross margins right. You got to have your ad spend right. And in our sample, we had very lean ad spend, much more so than I expected. And so I think gross margin is a great place to attack. If you are looking at profitability, hey, is there pricing we can do? Is there manufacturing things we can do to increase that?

And would you say, if I'm considering my gross margin and getting my business out of this no growth, not profitable, is everything on the table? Am I looking at my fulfillment? Am I looking at how I'm packaging everything? Am I looking at how many employees I have? Like if you're in this position, is everything on the table and you're scrutinizing every penny that is spent?

14:04 Stacy Walker

Yes, I think if profitability is an issue, like there is no, you should attack every potential cost. The challenge you run into is some things are easier to change than others. So things that are easier to change, discretionary spending, payroll to a certain degree, some fixed expenses can be cut faster.

Things that take more time. It's pretty easy to reduce your ad spend, but there's usually a correlation between a reduction in sales, so you have to be really careful. You can move quickly, but to move it effectively can take some time. If your advertising costs are high, it's an easy place to go and scrutinize.

15:00

Ad spend is not like a monolithic thing. There's multiple campaigns and ads, and it's a good opportunity to say, let's really dive in. Things that take longer, fulfillment costs. Fulfillment costs can be an equation of where your 3PL is located. It can be an equation of your product attributes, weight and size. So those can take longer to change. And then cost of goods, I think, is the hardest to change. So I'd say you can't change that cost of goods without talking about where you're manufacturing.

15:41

And obviously in the last year, the elephant in the room that we weren't really able to tease out in the data was the impact of tariffs, right? But we know there's impact. And this was our first report we've done. I'm sure as we go into future years, we'll be able to compare and contrast. But I'm sure there was some margin that was reduced through that.

16:08 Channel diversification and how to use the report

Stacy Walker

Yeah, yeah. I have another question for you, Stephen. Look at this for me. If I'm just looking at these numbers and nothing else, I wonder what impact is selling on multiple marketplaces having on our most successful sellers. We know they likely have a wholesale piece, at least a quarter of them, a little more than a quarter of them, have a brick and mortar presence. And then they're not just selling on Shopify. They have Amazon, they may have eBay or whatever else, not necessarily Amazon, but they're selling other marketplaces.

It leads me to believe that diversification is part of the strategy because then what if they're selling on Amazon and for some reason they get shut down for a while? They're not solely dependent on that. They've got other sources of income that are coming in. What are your thoughts there?

17:02 Stephen Brown

I think you have to be careful when you do analyses like these and jump to the wrong conclusions. The conclusion I might see here is I should go sell wholesale, I should go right out on multiple marketplaces, I should cut all my ad spend. These are aggregate numbers. I think what it's telling you is on the aggregate, some of these things are having better outcomes. That doesn't mean that you will. And so, caution when you see data like this. For example, increasing channel distribution is a great idea as long as the distribution works. And one of the things we've seen over the years is we've seen businesses that have success going from Shopify to Amazon, not as much the other way.

I think it's easier to go Shopify first and then expand onto Amazon. But I see very few brands who have real, real great success on eBay, Walmart or Etsy. And I don't see it as much, but years ago we would see customers that would just get on every marketplace because they could. And there's a cost to doing that.

18:18

I think kind of the ideal combo is probably like Shopify. And at some point you build enough critical mass, enough brand recognition, Amazon acts as a distribution channel. But I do feel like if you go to Amazon too early, it can cannibalize and cause other issues. Interestingly, you know, one of the things that the EcomFuel report was saying, because they've got multiple trends, they're seeing the percentage of their surveys on Amazon at the lowest level in years. So I think one of the takeaways I have there is Amazon's gotten really bad, right? They're constantly adding fees. And I think you have to be really careful on that conclusion.

19:04

I'd say the same thing goes for wholesale. Wholesale can be awesome if you're set up to execute on it. And being set up, like you've got your manufacturing, you know, inventory operations dialed in, you can deliver on what you have. You have the financial backing, because wholesale is a very cash intensive, cash demanding strategy. And so I think you have to be careful about not going into wholesale too quickly. So even though the aggregate data, the conclusions are what the data says, I would say an individual business's execution is really going to need to depend on, can they execute that step? And if the answer is no, that could actually be a really bad idea.

19:50 Stacy Walker

Yeah, I'm so glad you said that. When I reviewed this, that was my first thought. Oh no, what if people see this and think the answer to all my problems, if I'm not growing and not profitable, is to start selling wholesale or to throw on a few more marketplaces. And I agree with your assessment. It's a good thing to look at and potentially consider, but it's not going to save the organization. What surprised you?

Stephen Brown

The brick and mortar was higher than I thought. Again, it's a channel diversification strategy. So if you look at the wholesale, the brick and mortar, the multiple marketplaces, that's all about channel diversification. And it was a little bit higher than I thought. Part of what we were talking about internally, we wanted to use data that we had confidence in. So we re-looked at the businesses that we supported. And one of the questions I had in my head is, is this representative of the market as a whole, or is this representative of the customers that choose to work with LedgerGurus?

21:07 Stacy Walker

I think to a certain degree, it's the latter, especially when we compare that to like the EcomFuel report, which came around the same time, we're seeing some interesting differences in some of the key metrics. You know, I think it's the same thing. Brick and mortar can be a great strategy if you can execute well on that. And so again, I would just kind of caveat everything that I said before, of distribution works when you can execute well in it. And if you don't, it can be really, really painful.

21:43 Stephen Brown

Yeah, I agree. So if you were a seller right now looking at the benchmark report, what takeaways would be of most interest to you, that you could use that information to benchmark your own business and decide where to pivot, or if there are changes that need to be made?

22:09 Stacy Walker

It's really easy to jump to maybe bad conclusions when you do these type of reports. I don't care if it's us, EcomFuel. I'm trying to think of others that have done some of these type of benchmarks.

22:23 Stephen Brown

But the one thing that screams at me that I feel pretty confident in is the importance of profitability. Like again, if you go back to that quadrant summary, it's hard to ignore that correlation between profit and growth, obviously bank balance. What we can't convey here is maybe some stress, right? And so I've always kind of felt this, especially owning two businesses. I know how profitability impacts me as a business owner, not just from a financial standpoint, but from a health, from the ability to do things. And so if there's one takeaway I'd take from this report is, you know, profits are always a good thing to pursue.

23:15 Stacy Walker

Yeah, yeah, that's really good advice.

23:20 Where to start and staying profitable

Stacy Walker

So where does somebody start if they know they're not profitable?

23:26 Stephen Brown

Like I said, I think you really have to look at all of the economics of your business. I think you could look at three or four things really quickly. Gross margin, advertising, marketing efficiency, fulfillment costs. And then if those are all in a good place, and you and I have talked about this in previous webinars you can see on our YouTube, like gross margin, this number was a little bit lower. I actually looked, for like, if you're a pure DTC, I would say 70 to 80% is a good target.

24:03

Ad spend, 20 to 35 if you're pure DTC. If you are wholesaling or reselling, it's gonna be much lower as we see, and I think this is reflective of that channel diversification. And then fulfillment costs, which we didn't include in this year's report, but I can say anecdotally about 10 to 15%. If you're in the good ranges on those things and you're not profitable, you probably have too much overhead. Or maybe you've got some debt that's dragging you down, and you gotta really look at those and make sure that you're not allowing those things to be an anchor.

24:37

And how do you get there? I think you just have to, you know, you have to take a fine look at your business, where you're spending money, and just re-engineer, cut, whatever it takes to get there. And then once you're there, you know, you'll build up a discipline. It's a lot easier to scale from there.

24:51 Stacy Walker

Yeah, I think when you see a report like this and you are an ecommerce seller, your tendency is to see where you are failing. And we've talked about this. But let's talk a minute about those that are growing and profitable. Besides patting themselves on the back, how can they stay that way?

25:18 Stephen Brown

Well, I think it's hard to tease out the mindset behind, or the strategy behind, that growing unprofitable, but just from a financial standpoint, there's a profit mindset. Getting a profit mindset, I think, is one of the first things. Growth, there's so much that goes into growth success. That's really a factor of your product, of its uniqueness, of your brand. Profit is really more of a factor of your discipline.

25:56 Stacy Walker

Mm, I like that. Yeah, that's great. I want to point one thing out from the EcomFuel report that we need to add next time. They had a really great question that I feel like is kind of a nice place to end on, even though it's not our report. I think we don't care. We're here to highlight great industry insights. They had a question around financial knowledge versus outcomes, where people were self-rating.

26:27

And what was really interesting, there was a little dip overall between a four and a five, but when they controlled it for smaller brands, there was a huge difference in margin, in runway. That really is a terminology for how long you can go on the ability to, they're calling it extract capital, take money out of the business, growth of net income.

27:00 Stephen Brown

There's a clear correlation behind that. I think we feel the same way. Some of the best brands that we work with have great financial knowledge. We're here to help provide some of that data, but we can't get our customers to use it. We can't get our customers to ask all the questions they need to. And that was a huge insight for me, that financial outcome correlation versus knowledge.

27:36 Stacy Walker

Yeah. I think it's a really interesting thing. And I would say, you know, for those that are watching, you're trying to lean in.

27:45 Stephen Brown

It's a good thing. The more knowledgeable you are about financials and how your business works, out of financial sense, the easier it is for you to attack the problems and improve it. Yeah, that's how we print.

Any questions from the audience? Obviously I put a link in the chat where you could download the report if you haven't had a chance to look at it. We covered a few areas. There's a lot more to it. We would encourage you to download the report from that link. And if you wanted to have us do an assessment of your business, there is the opportunity to do that. If you look at the bottom of that link, I'll just show the screen. Not only is there ability to get the report for free, but we can do a personalized assessment of your business and give you a sense for where we think the opportunities are for you to grow, either your revenues or your profits.

28:47

What questions do people have? Question around the sample. About how many businesses did we assess?

28:55 Stacy Walker

It was about 90 businesses. 87 to 90, somewhere in that range. So a decently significant sample size.

29:07 Stephen Brown

Yeah. Let me maybe, to wrap up, let me ask you a question. Where would we see this going, this report, if we don't come back in a year? What are some of the things that we'd like to expand upon?

29:22 Stacy Walker

I'd like to expand on fulfillment. What percentage of income or revenue is used towards fulfillment? What type of fulfillment? I'd be interested to know some sort of a rating system on how much people are using AI in selling. I think that could be really interesting. And it would be interesting to note, the same as EcomFuel, the financial savviness of the seller.

Yeah, I thought they had some great questions in there. You know, part of the reason I would love to have an even bigger sample. I think their trends report had 300.

30:04

One of the things that we've asked a lot of questions is, how confident are we in some of those margins? Like their gross margins were even smaller than ours. And I think part of the reason their number was much lower than ours on the gross margin front is the way that margins are measured. We talk about gross margins looking only at product costs, but we see a lot of customers that are lumping in sales costs, like merchant fees, fulfillment costs, into their cost of goods.

30:47

We don't do that when allowed, when the customer allows us to, our preference is to put those expenses in line with generally accepted accounting principles. So that's probably one of the differences. But one of the things that we do feel confident in is we have more confidence in the data that we've presented. And like I said, there may be some caveats because of who we're working with. But those caveats can explain some of those things, like the lower ad spend.

31:08 Stephen Brown

Yeah, yeah, definitely, definitely. Awesome, so if you haven't had a chance, go to that link in the chat. Wait, I didn't put it, hold on. You're all probably saying, where is that link? I only sent it to panelists, so I'm sending that link now to everyone. You should be able to see that. If you wanna go in, download the full report. And if you wanna look at the bottom of that page and get an assessment of the health of your business and what our takeaways are, you can schedule that there.

31:39 Stacy Walker

Perfect.

Stephen Brown

Okay, thanks for joining us everyone. Thank you.